Ask the Institute

DATE: August 20, 2012QUESTION:Can you please discuss the "put-call ratio" and how a trader may use this to analyze market trends?

ANSWER: Quite simply, the "put-call ratio" compares the total number of puts traded on a specific day to the number of calls traded on that same day. The put-call ratio is considered a "sentiment indicator," which means that it is an estimate of the overall level of bullish feelings in the marketplace versus bearish feelings. In general, when traders are too bullish, or too optimistic, then very few puts are traded relative to the number of calls being traded. Therefore a "very low" put-call ratio is often interpreted as a bearish market indicator. On the flip side, in general, when traders are too bearish, or too pessimistic, then a high volume of puts are traded relative to the number of calls being traded. Therefore a "very high" put-call ratio is often interpreted as bullish market indicator. To learn more about the put-call ratio, view this week's segment of "Ask the Institute."